Loan Market Remains Weak Amid Small-Business Struggles

Small-business credit quality weakened in the third quarter, as the health of the loan market remains weak, and a speedy recovery isn't likely. Findings from the Experian/Moody's Analytics Small Business Credit Index released today showed many small businesses continue to have trouble paying off their loans and that demand for new loans remains weak.

While 30- and 60-day past-due balances have improved, those loans that are considered severely delinquent -- more than 90 days past due -- are increasing. What's more, the delinquency rate for these balances is the highest it has been since the firms began monitoring the data several years ago.

The Index slipped 1.6 points in the third quarter to 104.1, down from a revised 105.7 in the second quarter. "Appreciable improvements in small business credit quality are unlikely until mid-to late 2013," according to the report.

It's encouraging that shorter term balances are improving, according to Mark Zandi, chief economist at Moody's Analytics. But the data also shows that troubled businesses are still stuck in a rut. A slowdown in consumer spending makes it more difficult for small businesses to get ahead in their loan payments.

The dollar value of severely delinquent loans has stayed about the same for more than a year, but the total credit outstanding continues to decline due to fewer loans being made.

Loan volume is down for a host of factors, including tighter lending standards and less willingness by small businesses to pile on additional debt. It's unclear from the data how much of the loan volume decrease has to do with lower demand versus tighter lending standards.

However, lower demand for loans seems to be more of a factor, according to Zandi. Businesses are still nervous about taking on debt and many have enough cash on hand, reducing the need for loans, he says.

Uncertainty over the fiscal cliff, the Treasury debt ceiling, deficit reduction and taxes will likely continue to weigh on credit quality over the next several quarters. There is hope, however, that credit conditions will improve if President Obama and Congress address the various fiscal problems in a reasonable and timely fashion.